Learn what an interest rate swap is and why borrowers and investors use it to exchange fixed and floating rate exposure.
An interest rate swap is a derivative contract in which two parties exchange interest-payment streams, commonly swapping fixed-rate exposure for floating-rate exposure or vice versa, based on a notional amount.
The contract matters because it lets parties reshape interest-rate exposure without refinancing the underlying debt itself. A borrower with floating-rate debt may want fixed exposure, while another party may want the opposite. The swap changes the economic rate profile while leaving the original borrowing or investing instrument in place.
A company with floating-rate debt may enter a swap that pays fixed and receives floating, effectively turning its financing cost into something closer to a fixed rate.
A manager says, “An interest rate swap means the underlying debt disappears.” Is that correct?
Answer: No. The swap overlays rate exposure; it does not eliminate the original instrument by itself.